FR article is behind a paywall, so here it is
The growing danger of deflationthreatens to derail the global economic recovery, Christine Lagarde, managing director of the International Monetary Fund, said on Wednesday as she stressed that the world had yet to put the financial crisis behind it.
“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” said Ms Lagarde, in a speech at the National Press Club in Washington. “If inflation is the genie, then deflation is the ogre that must be fought decisively.”
With central bankers afraid even to mention the word “deflation”, Ms Lagarde’s remarks make her the first high-profile policy maker to give warning that extremely low inflation in rich countries could result in the kind of falling prices that have dogged Japan’s economy for two decades.
Slow inflation could allow central bankers to keep monetary policy exceptionally loose, even as employment picks up in countries including the US and the UK.
“Central banks should return to more conventional monetary policies only when robust growth is firmly rooted,” said Ms Lagarde.
Inflation in the UK has fallen back to the Bank of England’s 2 per cent target for the first time in years, while the US consumer price index is up by only 1.2 per cent on a year ago. But the eurozone is at greatest risk, with inflation falling to only 0.8 per cent in December and unemployment still stuck at 12.1 per cent.
A slide into absolute deflation could discourage consumption and investment as it raised the real cost of borrowing and made monetary policy less effective.
Ms Lagarde’s comments were echoed by Charles Evans, president of the Chicago Fed. “The recent news on inflation has not been good,” he said in a speech on Wednesday. “Inflation is too low and is running well below the FOMC’s 2 per cent target.”
Ms Lagarde said that the overall economic picture was encouraging. “This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter,” she said.
“My great hope is that 2014 will prove momentous; . . the year in which the ‘seven weak years’, economically speaking, slide into ‘seven strong years’.”
She said that the global economy had strengthened at the end of 2013, but “is still stuck in low gear”. “This means that the world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle."
In the US, she said, growth was picking up, but “it will be critical to avoid premature withdrawal of monetary support, and to return to an orderly budget process, including by promptly removing the debt ceiling threat”.
Ms Lagarde said that the eurozone “is turning the corner from recession to recovery”, but that “unemployment is still worryingly high”.
She said that the European Central Bank could do more to help. “Targeted lending, for example, could help reduce financial fragmentation. The forthcoming review of asset quality and stress tests can also help, but only if they are done in an even-handed and credible manner.”
The growing danger of deflation threatens to derail the global economic recovery, Christine Lagarde, managing director of the International Monetary Fund, said on Wednesday as she stressed that the world had yet to put the financial crisis behind it.